10-Q


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2015
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number 001-37482
The Kraft Heinz Company
(Exact name of registrant as specified in its charter)

DELAWARE
 
46-2078182
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One PPG Place, Pittsburgh, Pennsylvania
(Address of Principal Executive Offices)
 
15222
(Zip Code)

(412) 456-5700
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X  No   
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes X  No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer _
Accelerated filer _
Non-accelerated filer X
Smaller reporting company _
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No X  
The number of shares of the Registrant’s common stock outstanding as of November 1, 2015 was 1,213,455,716 shares.





The Kraft Heinz Company
Table of Contents

Unless the context otherwise requires, the terms “we,” “us,” “our,” “Kraft Heinz,” and the “Company” refer, collectively, to The Kraft Heinz Company.





PART I — FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data.
The Kraft Heinz Company
Condensed Consolidated Statements of Income
(in millions, except per share data)
(Unaudited)

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Net sales
$
6,120

 
$
2,594

 
$
11,214

 
$
8,123

Cost of products sold
4,492

 
1,827

 
7,857

 
5,741

Gross profit
1,628

 
767

 
3,357

 
2,382

Selling, general and administrative expenses
1,229

 
358

 
2,005

 
1,166

Operating income
399

 
409

 
1,352

 
1,216

Interest expense
460

 
167

 
1,055

 
504

Other expense, net
108

 
28

 
314

 
80

(Loss)/income before income taxes
(169
)
 
214

 
(17
)
 
632

(Benefit from)/provision for income taxes
(49
)
 
40

 
(16
)
 
125

Net (loss)/income
(120
)
 
174

 
(1
)
 
507

Net income attributable to noncontrolling interest
3

 
2

 
10

 
13

Net (loss)/income attributable to Kraft Heinz
(123
)
 
172

 
(11
)
 
494

Preferred dividend
180

 
180

 
540

 
540

Net loss attributable to common shareholders
$
(303
)
 
$
(8
)
 
$
(551
)
 
$
(46
)
 
 
 
 
 
 
 
 
Per share data applicable to common shareholders:
 
 
 
 
 
 
 
Basic loss per share
$
(0.27
)
 
$
(0.02
)
 
$
(0.87
)
 
$
(0.12
)
Diluted loss per share
$
(0.27
)
 
$
(0.02
)
 
$
(0.87
)
 
$
(0.12
)
Dividends declared
$
0.55

 
$

 
$
0.55

 
$


See accompanying notes to the condensed consolidated financial statements.


1



The Kraft Heinz Company
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(Unaudited)

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Net (loss)/income
$
(120
)
 
$
174

 
$
(1
)
 
$
507

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,023
)
 
(714
)
 
(1,456
)
 
(419
)
Net deferred gains on net investment hedges
195

 
269

 
421

 
109

Net postemployment benefit gains/(losses)
892

 
(25
)
 
873

 
(53
)
Reclassification of net postemployment benefit gains to net income
(11
)
 
(1
)
 
(4
)
 
(3
)
Net deferred gains/(losses) on cash flow hedges
45

 
23

 
(32
)
 
(136
)
Net deferred (gains)/losses on cash flow hedges reclassified to net income
(9
)
 
4

 
129

 

Total other comprehensive income/(loss)
89

 
(444
)
 
(69
)
 
(502
)
Total comprehensive (loss)/income
(31
)
 
(270
)
 
(70
)
 
5

Comprehensive income/(loss) attributable to noncontrolling interest
(14
)
 
(2
)
 
(20
)
 
12

Comprehensive loss attributable to Kraft Heinz
$
(17
)
 
$
(268
)
 
$
(50
)
 
$
(7
)

See accompanying notes to the condensed consolidated financial statements.




2



The Kraft Heinz Company
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
September 27, 2015
 
December 28, 2014
ASSETS
 
 
 
Cash and cash equivalents
$
4,437

 
$
2,298

Trade receivables (net of allowances of $32 in 2015 and $8 in 2014)
1,613

 
851

Inventories
2,981

 
1,185

Other current assets
1,380

 
581

Total current assets
10,411

 
4,915

Property, plant and equipment, net
6,432

 
2,365

Goodwill
46,750

 
14,959

Intangible assets, net
56,693

 
13,188

Other assets
1,506

 
1,108

TOTAL ASSETS
$
121,792

 
$
36,535

LIABILITIES AND EQUITY
 
 
 
Trade payables
$
2,719

 
$
1,651

Accrued marketing
732

 
297

Accrued postemployment costs
401

 
15

Income taxes payable
410

 
232

Other current liabilities
1,484

 
897

Total current liabilities
5,746

 
3,092

Long-term debt
25,250

 
13,358

Deferred income taxes
19,684

 
3,867

Accrued postemployment costs
3,019

 
244

Other liabilities
734

 
289

TOTAL LIABILITIES
54,433

 
20,850

Commitments and Contingencies (Note 16)

 

Redeemable noncontrolling interest
22

 
29

9.00% Series A cumulative redeemable preferred stock, 80,000 authorized and issued shares at September 27, 2015 and December 28, 2014, $.01 par value
8,320

 
8,320

Equity:
 
 
 
Common stock, $.01 par value (5,000,000,000 shares authorized, 1,213,358,420 shares issued and 1,213,171,703 shares outstanding at September 27, 2015; 4,000,000,000 shares authorized, 377,010,463 shares issued and outstanding at December 28, 2014)
12

 
4

Warrants

 
367

Additional paid-in capital
59,622

 
7,320

Retained deficit
(196
)
 

Accumulated other comprehensive losses
(613
)
 
(574
)
Treasury stock, at cost
(14
)
 

Total shareholders' equity
58,811

 
7,117

Noncontrolling interest
206

 
219

TOTAL EQUITY
59,017

 
7,336

TOTAL LIABILITIES AND EQUITY
$
121,792

 
$
36,535


See accompanying notes to the condensed consolidated financial statements.

3



The Kraft Heinz Company
Condensed Consolidated Statement of Equity
(in millions)
(Unaudited)
 
Common Stock
 
Warrants
 
Additional Paid-in Capital
 
Retained Deficit
 
Accumulated Other Comprehensive Losses
 
Treasury Stock
 
Noncontrolling Interest
 
Total Equity
Balance at December 28, 2014
$
4

 
$
367

 
$
7,320

 
$

 
$
(574
)
 
$

 
$
219

 
$
7,336

Net (loss)/income

 

 

 
(11
)
 

 

 
10

 
(1
)
Other comprehensive loss excluding redeemable noncontrolling interest

 

 

 

 
(39
)
 

 
(23
)
 
(62
)
Dividends declared-preferred stock

 

 
(360
)
 
(180
)
 

 

 

 
(540
)
Dividends declared-common stock

 

 
(668
)
 

 

 

 

 
(668
)
Exercise of warrants

 
(367
)
 
367

 

 

 

 

 

Issuance of common stock
2

 

 
9,998

 

 

 

 

 
10,000

Acquisition of Kraft Foods Group, Inc.
6

 

 
42,849

 

 

 

 

 
42,855

Exercise of stock options, issuance of other stock awards, and other

 

 
116

 
(5
)
 

 
(14
)
 

 
97

Balance at September 27, 2015
$
12

 
$

 
$
59,622

 
$
(196
)
 
$
(613
)
 
$
(14
)
 
$
206

 
$
59,017


See accompanying notes to the condensed consolidated financial statements.

4



The Kraft Heinz Company
Condensed Consolidated Statements of Cash Flows
(in millions)
(Unaudited)

 
For the Nine Months Ended
 
September 27, 2015
 
September 28, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net (loss)/income
$
(1
)
 
$
507

Adjustments to reconcile net (loss)/income to operating cash flows:
 
 
 
Depreciation and amortization
402

 
429

Amortization of postretirement benefit plans prior service credits
(31
)
 
(5
)
Equity award compensation expense
98

 
6

Deferred income tax provision
(562
)
 
(140
)
Pension contributions
(47
)
 
(59
)
Impairment losses on indefinite-lived intangible assets
58

 
62

Nonmonetary currency devaluation
234

 

Loss on discontinuation of interest rate cash flow hedge
227

 

Write-off of debt issuance costs
236

 

Other items, net
(13
)
 
146

Changes in current assets and liabilities:
 
 
 
Receivables
281

 
103

Inventories
23

 
(27
)
Accounts payable
(97
)
 
185

Other current assets
15

 
(8
)
Other current liabilities
(77
)
 
132

Net cash provided by operating activities
746

 
1,331

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(366
)
 
(247
)
Proceeds from disposals of property, plant and equipment
8

 
42

Payments to acquire Kraft Foods Group, Inc., net of cash acquired
(9,468
)
 

Proceeds from net investment hedges
481

 

Other investing activities, net
(56
)
 
(4
)
Net cash used for investing activities
(9,401
)
 
(209
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments of long-term debt
(12,308
)
 
(75
)
Proceeds from issuance of long-term debt
14,823

 
2

Net repayments of short-term debt
(49
)
 
(11
)
Proceeds from issuance of common stock
10,000

 

Dividends paid-preferred stock
(540
)
 
(540
)
Dividends paid-common stock
(637
)
 

Other financing activities, net
(98
)
 
14

Net cash provided by/(used for) financing activities
11,191

 
(610
)
Effect of exchange rate changes on cash and cash equivalents
(397
)
 
(117
)
Cash and cash equivalents:
 
 
 
Net increase
2,139

 
395

Balance at beginning of period
2,298

 
2,459

Balance at end of period
$
4,437

 
$
2,854


See accompanying notes to the condensed consolidated financial statements.


5



The Kraft Heinz Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Background and Basis of Presentation
Basis of Presentation:
Our interim condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. In management’s opinion, these interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary to present fairly our results for the periods presented.
The condensed consolidated balance sheet data at December 28, 2014 were derived from audited financial statements, but do not include all disclosures required by U.S. GAAP. You should read these statements in conjunction with our audited consolidated financial statements and related notes, as of and for the year ended December 28, 2014, included in our Registration Statement on Form S-4 (the “Form S-4”) filed with the Securities and Exchange Commission (the “SEC”), which was declared effective on June 2, 2015. The results for interim periods are not necessarily indicative of future or annual results.
Organization:
On July 2, 2015 (the “Merger Date”), through a series of transactions, we consummated the merger of Kraft Foods Group, Inc. (“Kraft”) with and into a wholly owned subsidiary of H.J. Heinz Holding Corporation (“Heinz”) (the “2015 Merger”). At the closing of the 2015 Merger, Heinz was renamed The Kraft Heinz Company (“Kraft Heinz”).
Before the consummation of the 2015 Merger, Heinz had been controlled by Berkshire Hathaway Inc. (“Berkshire Hathaway”) and 3G Global Food Holdings, L.P. (“3G Capital,” and together with Berkshire Hathaway, the “Sponsors”) following their acquisition of H.J. Heinz Company on June 7, 2013 (the “2013 Merger”). The Sponsors initially owned 850 million shares of common stock in Heinz; Berkshire Hathaway also held a warrant to purchase 46 million additional shares of common stock, which it exercised in June 2015. Prior to, but in connection with, the 2015 Merger, the Sponsors made equity investments whereby they purchased an additional 500 million newly issued shares of Heinz common stock for an aggregate purchase price of $10.0 billion.
Immediately prior to the consummation of the 2015 Merger, each share of Heinz issued and outstanding common stock was reclassified and changed into 0.443332 of a share of Kraft Heinz common stock. All share and per share amounts in the condensed consolidated financial statements and related notes have been retroactively adjusted for all periods presented to give effect to this conversion, including reclassifying an amount equal to the change in par value of common stock from additional paid-in capital. In the 2015 Merger, all outstanding shares of Kraft common stock (other than deferred shares and restricted shares) were converted into the right to receive, on a one-for-one basis, shares of Kraft Heinz common stock. Upon the completion of the 2015 Merger, the Kraft shareholders of record immediately prior to the closing of the 2015 Merger received a special cash dividend of $16.50 per share.
Changes in Accounting and Reporting:
Effective in the third quarter of 2015, we made the following changes in accounting and reporting to harmonize our accounting and reporting as Kraft Heinz:
We made a voluntary change in accounting policy to classify certain warehouse and distribution costs (including shipping and handling costs) associated with the distribution of finished product to our customers as cost of products sold, which were previously recorded in selling, general and administrative expenses (“SG&A”). We made this voluntary change in accounting policy because we believe this presentation is preferable, as the classification in cost of products sold better reflects the cost of producing and distributing products. Additionally, this presentation enhances the comparability of our financial statements with industry peers and aligns with how we internally manage and review costs. As required by U.S. GAAP, the change has been reflected in the condensed consolidated statements of income through retrospective application of the change in accounting policy. The impact of this change was to increase cost of products sold and decrease SG&A by $171 million for the three months and $501 million for the nine months ended September 28, 2014.

6



We made a voluntary change in accounting policy to classify our trademark and license intangible asset impairments and amortization in SG&A, which were previously recorded in cost of products sold. We made this voluntary change in accounting policy because we believe this presentation is preferable, as removing these expenses from cost of products sold better aligns cost of products sold with costs directly associated with generating revenue. Additionally, this presentation enhances the comparability of our financial statements with industry peers and aligns with how we internally manage and review costs. As required by U.S. GAAP, the change has been reflected in the condensed consolidated statements of income through retrospective application of the change in accounting policy. The impact of this change was to increase SG&A and decrease cost of products sold by $5 million for the three months and $77 million for the nine months ended September 28, 2014.
During the third quarter of 2015, we determined that we had previously misclassified customer related intangible asset amortization. Such costs were previously included in cost of products sold but should have been included in SG&A. We have revised the classification to report these expenses in SG&A in the condensed consolidated statements of income for the three and nine months ended September 28, 2014. The impact of this revision was to increase SG&A and decrease cost of products sold by $17 million for the three months and $51 million for the nine months ended September 28, 2014.
Beginning in the third quarter of 2015, based on materiality considerations, we reclassified expenses related to the 2015 Merger into SG&A. Previously, we recorded these expenses as 2015 Merger related costs in our condensed consolidated statements of income.
In the third quarter of 2015, based on materiality considerations, we reclassified interest income into other expense, net. Previously, it was recorded as interest income in our condensed consolidated statements of income.
During the first quarter of 2015, we determined that we had misstated foreign currency translation gains and losses on goodwill from the date of the 2013 Merger through December 28, 2014, as well as deferred taxes recognized on the 2013 Merger opening balance sheet. During the first quarter of 2015, we recorded out-of-period corrections to reduce goodwill by $40 million, reduce deferred tax assets by $11 million, and reduce accumulated other comprehensive income by $51 million. These misstatements were not material to our current or any prior period financial statements.
Recently Issued Accounting Standards:
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update (“ASU”) that superseded previously existing revenue recognition guidance. Under this ASU, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This ASU will be effective beginning in the first quarter of our fiscal year 2018. We are currently evaluating the impact that this ASU will have on our financial statements and related disclosures.
In April 2015, the FASB issued an ASU intended to simplify the presentation of debt issuance costs. The ASU requires that debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of debt, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. We early-adopted this ASU in the third quarter of 2015, and accordingly reclassified unamortized debt issuance costs of $228 million from other assets to long-term debt on the condensed consolidated balance sheet at December 28, 2014.
In September 2015, the FASB issued an ASU intended to simplify the accounting for measurement period adjustments in a business combination. Measurement period adjustments are changes to provisional amounts recorded when the accounting for a business combination is incomplete as of the end of a reporting period. The measurement period can extend for up to a year following the transaction date. During the measurement period, companies may make adjustments to provisional amounts when information necessary to complete the measurement is received. The ASU requires companies to recognize these adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined. Companies are no longer required to retroactively apply measurement period adjustments to all periods presented. We early-adopted this ASU in the third quarter of 2015. The adoption of this ASU did not have a material impact on our financial statements and related disclosures.

7



Note 2. Merger and Acquisition
Transaction Overview:
As discussed in Note 1, Background and Basis of Presentation, Heinz merged with Kraft on July 2, 2015. The Kraft businesses manufacture and market food and beverage products, including cheese, meats, refreshment beverages, coffee, packaged dinners, refrigerated meals, snack nuts, dressings, and other grocery products, primarily in the United States and Canada. Total net sales for Kraft during its most recent pre-acquisition year ended December 27, 2014 were $18.2 billion. Following the Merger Date, the operating results of the Kraft businesses have been included in our condensed consolidated financial statements. For the period from the Merger Date through September 27, 2015, Kraft's net sales were $3.9 billion and net loss was $90 million.
The 2015 Merger was accounted for under the acquisition method of accounting for business combinations and Heinz was considered to be the acquiring company. Under the acquisition method of accounting, total consideration exchanged was (in millions):
Aggregate fair value of Kraft common stock
$
42,502

$16.50 per share special cash dividend
9,782

Fair value of replacement equity awards
353

Total consideration exchanged
$
52,637

Valuation Assumptions and Preliminary Purchase Price Allocation:
We utilized estimated fair values at the Merger Date for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of net assets acquired, which may differ materially from these preliminary estimates. If we determine any measurement period adjustments are material, we will apply those adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined.
The preliminary purchase price allocation to assets acquired and liabilities assumed in the transaction was:
 
(in millions)
Cash
$
314

Other current assets
3,893

Property, plant and equipment
4,215

Identifiable intangible assets
44,107

Other non-current assets
661

Trade and other payables
(3,370
)
Long-term debt
(9,286
)
Net postemployment benefits and other noncurrent liabilities
(4,731
)
Deferred income tax liabilities
(15,812
)
Net assets acquired
19,991

Goodwill on acquisition
32,646

Total consideration
52,637

Preliminary fair value of shares exchanged and equity awards
42,855

Total cash consideration paid to Kraft shareholders
9,782

Cash and cash equivalents of Kraft at Merger Date
314

Acquisition of business, net of cash on hand
$
9,468

The 2015 Merger preliminarily resulted in $32.6 billion of non tax deductible goodwill relating principally to synergies expected to be achieved from the combined operations and planned growth in new markets. Goodwill has preliminarily been allocated to our reportable segments as shown in Note 6, Goodwill and Intangible Assets.

8



The preliminary purchase price allocation to identifiable intangible assets acquired was:
 
Preliminary Fair Value
 
Weighted Average Life
 
(in millions of dollars)
 
 
Indefinite-lived trademarks
$
39,710

 
 
Definite-lived trademarks
1,594

 
23
Customer relationships
2,803

 
29
Total identifiable intangible assets
$
44,107

 
 
We preliminarily valued trademarks using either the excess earnings method or relief from royalty method, which are both variations of the income approach. We used the excess earnings method for our most significant trademarks due to their impact on the cash flows of the business and used the relief from royalty method for the remaining trademarks and licenses. For customer relationships, we used the distributor method, a variation of the excess earnings method that uses distributor-based inputs for margins and contributory asset charges.
Some of the more significant assumptions inherent in developing the valuations included the estimated annual net cash flows for each indefinite-lived or definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management plans, and market comparables. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. Preliminary assumptions may change and may result in significant changes to the final valuation.
We used existing carrying values to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as we determined that they represented the fair value of those items at the Merger Date.
We preliminarily valued finished goods and work-in-process inventory using a net realizable value approach, which resulted in a step-up of $347 million that was recognized in cost of products sold in the period from the Merger Date to September 27, 2015 as the related inventory was sold. Raw materials and packaging inventory was valued using the replacement cost approach.
We preliminarily valued property, plant and equipment using a combination of the income approach, the market approach and the cost approach, which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors.
Deferred income tax assets and liabilities as of the Merger Date represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases.
Pro Forma Results:
The following tables provide unaudited pro forma results, prepared in accordance with ASC 805, for the three and nine months ended September 27, 2015 and September 28, 2014, as if Kraft had been acquired as of December 30, 2013.
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
(in millions, except per share data)
Net sales
$
6,363

 
$
6,993

 
$
20,323

 
$
21,626

Net income
12

 
608

 
1,116

 
1,500

Basic (loss)/earnings per share
(0.14
)
 
0.36

 
0.48

 
0.80

Diluted (loss)/earnings per share
(0.14
)
 
0.35

 
0.47

 
0.78

The unaudited pro forma results include certain preliminary purchase accounting adjustments. We have made pro forma adjustments to 2015 results to exclude deal costs (“Deal Costs”) of $59 million, net of tax, for the three and $102 million, net of tax, for the nine months ended September 27, 2015 and to exclude $213 million, net of tax, of non-cash costs related to the fair value step-up of Kraft’s inventory (“Inventory Step-up Costs”) for the three and nine months ended September 27, 2015, because such costs are nonrecurring and are directly attributable to the 2015 Merger. As required by U.S. GAAP, we have made pro forma adjustments to include the Deal Costs and Inventory Step-up Costs in results for the three and nine months ended September 28, 2014.

9



The unaudited pro forma results do not include any anticipated cost savings or other effects of future integration efforts. Unaudited pro forma amounts are not necessarily indicative of results had the 2015 Merger occurred on December 30, 2013 or of future results.
Note 3. Integration and Restructuring Expenses
Following the 2015 Merger, we announced a multi-year program (the “Integration Program”) designed to reduce costs, integrate, and optimize the combined organization. As part of these activities, we incur expenses (primarily employee separations, lease terminations and other direct exit costs) that qualify as exit and disposal costs under U.S. GAAP. We also incur expenses that are an integral component of, and directly attributable to, our restructuring activities, which do not qualify as exit and disposal costs (primarily accelerated depreciation, asset impairments, implementation costs such as new facility relocation and start-up costs, and other incremental costs).
Integration Program:
The Integration Program is expected to achieve $1.5 billion of pre-tax savings by 2017, primarily benefiting the United States and Canada reportable segments, and will be sourced from our organization, footprint and zero-based budgeting productivity plans.
We currently expect the Integration Program will result in $1.9 billion of pre-tax costs, with approximately 60% reflected in cost of products sold, comprised of the following categories:
Organization costs ($700 million) associated with our plans to streamline and simplify our operating structure, resulting in workforce reduction. These costs will primarily include: severance and employee benefits (cash severance, non-cash severance, including accelerated equity award compensation expense, and pension and other termination benefits). Beginning in August 2015, we announced a new, streamlined structure for our businesses in the United States and Canada reportable segments. This resulted in the reduction of salaried positions across the United States and Canada. We currently expect to eliminate 2,650 positions.
Footprint costs ($1.1 billion) associated with our plans to optimize our production and supply chain network, resulting in facility closures and consolidations. These costs will primarily include: asset-related costs (accelerated depreciation and asset impairment charges), costs to exit facilities, relocation and start-up costs of new facilities, and severance and employee benefits. On November 4, 2015, we announced the closure of an additional 7 factories and began consolidation of our distribution network. In a staged process over the next 12-24 months, production in these locations will shift to other existing factories in the United States and Canada. Overall, we expect to eliminate 2,600 positions.
Other costs ($100 million) incurred as a direct result of restructuring activities, primarily including: contract and lease terminations, professional fees and other incremental third-party fees.
For the three months ended September 27, 2015, we have incurred costs of $401 million under the Integration Program including: $375 million of severance and employee benefit costs, $3 million of non-cash asset-related costs and $23 million of other implementation costs. For the nine months ended September 27, 2015, we have incurred $443 million of costs under the Integration Program including: $379 million of severance and employee benefit costs, $25 million of non-cash asset-related costs, $34 million of other implementation costs and $5 million of other exit costs. We expect approximately 60% of the Integration Program expenses will be cash expenditures. Additionally, we anticipate capital expenditures of approximately $1.1 billion related to the Integration Program.
At September 27, 2015, the total Integration Program liability related primarily to the elimination of salaried positions across the United States and Canada; 2,250 of whom have left the company by September 27, 2015. As of September 27, 2015, the liability balance associated with the Integration Program, which qualifies as U.S. GAAP exit and disposal costs, was:
 
Severance and Employee Benefit Costs
 
Other Exit Costs(a)
 
Total
 
(in millions)
Balance at December 28, 2014
$

 
$

 
$

Charges
379

 
5

 
384

Cash payments
(147
)
 
(2
)
 
(149
)
Non-cash utilization
(64
)
 

 
(64
)
Balance at September 27, 2015
$
168

 
$
3

 
$
171

(a) Other costs primarily represent contract and lease terminations.
We expect a substantial portion of the Integration Program liability at September 27, 2015 will be paid in the remainder of 2015.

10



Restructuring Activities:
Prior to the 2015 Merger, Heinz executed a number of other restructuring activities focused primarily on work-force reduction and factory closure and consolidation in relation to the 2013 Merger. Those programs, which are substantially complete, resulted in the elimination of 7,800 positions and cumulative $500 million severance and employee benefit costs, $330 million non-cash asset-related costs and $160 million other exit costs through September 27, 2015. We incurred costs related to our restructuring activities of $81 million in the three months and $144 million in the nine months ended September 27, 2015 and $141 million in the three months and $445 million in the nine months ended September 28, 2014.
As of September 27, 2015, the liability balance associated with active restructuring projects, which qualifies as U.S. GAAP exit and disposal costs, was:
 
Severance and Employee Benefit Costs
 
Other Exit Costs(a)
 
Total
 
(in millions)
Balance at December 28, 2014
$
53

 
$
26

 
$
79

Charges
49

 
14

 
63

Cash payments
(86
)
 
(14
)
 
(100
)
Non-cash utilization
(1
)
 
(1
)
 
(2
)
Balance at September 27, 2015
$
15

 
$
25

 
$
40

(a) Other costs primarily represent contract and lease terminations.

Total Integration and Restructuring:
Our total Integration Program and Restructuring expenses were:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
(in millions)
Severance and Employee benefit costs - COGS
$
85

 
$
21

 
$
104

 
$
100

Severance and Employee benefit costs - SG&A
311

 
21

 
324

 
32

Asset related costs - COGS
49

 
41

 
83

 
169

Asset related costs - SG&A

 

 

 
8

Other exit costs - COGS
25

 
47

 
48

 
107

Other exit costs - SG&A
12

 
11

 
28

 
29

 
$
482

 
$
141

 
$
587

 
$
445

Following the 2015 Merger, in the third quarter, we began to report under a new segment structure (see Note 18, Segment Reporting, for additional information) and have reflected these changes for all historical periods presented. We do not include Integration Program and Restructuring expenses within Segment Adjusted EBITDA. The pre-tax impact of allocating such expenses to our reportable segments would have been as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
(in millions)
United States
$
365

 
$
47

 
$
405

 
$
130

Canada
39

 

 
51

 
103

Europe
72

 
73

 
106

 
144

Rest of World
1

 
14

 
10

 
34

Non-Operating
5

 
7

 
15

 
34

 
$
482

 
$
141

 
$
587

 
$
445


11



Note 4. Inventories
Inventories at September 27, 2015 and December 28, 2014 were:
 
September 27, 2015
 
December 28, 2014
 
(in millions)
Packaging and ingredients
$
611

 
$
223

Work in process
405

 
136

Finished product
1,965

 
826

Inventories
$
2,981

 
$
1,185

Note 5. Property, Plant and Equipment
Property, plant and equipment at September 27, 2015 and December 28, 2014 were:
 
September 27, 2015
 
December 28, 2014
 
(in millions)
Land
$
317

 
$
199

Buildings and improvements
1,690

 
597

Equipment and other
4,214

 
1,735

Construction in progress
824

 
265

 
7,045

 
2,796

Accumulated depreciation
(613
)
 
(431
)
Property, plant and equipment, net
$
6,432

 
$
2,365

In the third quarter of 2015, we consummated the 2015 Merger and preliminarily recorded $4.2 billion of property, plant and equipment in purchase accounting. See Note 2, Merger and Acquisition, for additional information.
Note 6. Goodwill and Intangible Assets
Goodwill:
Changes in the carrying amount of goodwill from December 28, 2014 to September 27, 2015, by reportable segment, were:
 
United States
 
Canada
 
Europe
 
Rest of World
 
Total
 
(in millions)
Balance at December 28, 2014
$
8,754

 
$
1,348

 
$
3,454

 
$
1,403

 
$
14,959

2015 Merger purchase accounting
27,682

 
4,964

 

 

 
32,646

Translation adjustments

 
(540
)
 
(115
)
 
(246
)
 
(901
)
Other
1

 
(5
)
 
(94
)
 
144

 
46

Balance at September 27, 2015
$
36,437

 
$
5,767

 
$
3,245

 
$
1,301

 
$
46,750

In the third quarter of 2015, we consummated the 2015 Merger and preliminarily recorded $32.6 billion of goodwill in purchase accounting. The assignment of goodwill to reporting units was not complete as of the issuance date of this report. The goodwill recorded in connection with the 2015 Merger represented the preliminary fair value as of the Merger Date.
Additionally, we perform our annual impairment testing in the second quarter or when a triggering event occurs. We performed our annual impairment testing in the second quarter of 2015, prior to the completion of the 2015 Merger. No impairment of goodwill was reported as a result of our 2015 annual goodwill impairment test; however, the historical Heinz North America Consumer Products reporting unit had an estimated fair value in excess of its carrying value of less than 10%.
No events occurred during the three months ended September 27, 2015 that indicated it was more likely than not that our goodwill was impaired. If our current expectations of future growth rates are not met or if valuation factors outside of our control, such as discount rates, change unfavorably, the estimated fair value of our goodwill could be adversely affected, leading to a potential impairment in the future. There were no accumulated impairment losses to goodwill as of September 27, 2015.

12



Indefinite-lived intangible assets:
Indefinite-lived intangible assets primarily consisted of trademarks. The changes in indefinite-lived intangible assets from December 28, 2014 to September 27, 2015 were:
 
(in millions)
Balance at December 28, 2014
$
11,872

2015 Merger purchase accounting
39,710

Impairment losses on indefinite-lived intangible assets
(58
)
Transfers to definite-lived intangible assets
(553
)
Translation adjustments
(392
)
Balance at September 27, 2015
$
50,579

In the third quarter of 2015, we consummated the 2015 Merger and preliminarily recorded $39.7 billion of indefinite-lived intangible assets in purchase accounting. The indefinite-lived intangible assets recorded in connection with the 2015 Merger represented the current fair values as of the Merger Date.
Additionally, we test indefinite-lived intangible assets for impairment at least annually in the second quarter or when a triggering event occurs. We performed our annual impairment testing in the second quarter of 2015, prior to the completion of the 2015 Merger. As a result of our 2015 annual impairment test, we recognized non-cash impairment losses of $58 million in SG&A. The impairment losses were primarily related to declines within frozen soup in the United States, frozen meals and snacks primarily in the United Kingdom, and pasta sauce in the United States and Canada. Additionally, during our 2015 annual impairment test, 21 brands, with an aggregate carrying value of $2.4 billion, had excess fair values over their carrying values of less than 10%.
No events occurred during the three months ended September 27, 2015 that indicated it was more likely than not that our indefinite-lived intangible assets were impaired. If our current expectations of future growth rates are not met or if valuation factors outside of our control, such as discount rates, change unfavorably, the estimated fair values of our indefinite-lived intangible assets could be adversely affected, leading to potential impairments in the future.
As a result of our 2014 annual impairment test, we recognized non-cash impairment losses of $62 million in SG&A.
Definite-lived intangible assets:
Definite-lived intangible assets at September 27, 2015 and December 28, 2014 were:
 
September 27, 2015
 
December 28, 2014
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
(in millions)
Trademarks
$
2,091

 
$
(22
)
 
$
2,069

 
$

 
$

 
$

Customer-related assets
4,051

 
(166
)
 
3,885

 
1,315

 
(99
)
 
1,216

Licenses
193

 
(44
)
 
149

 
118

 
(31
)
 
87

Other
15

 
(4
)
 
11

 
15

 
(2
)
 
13

 
$
6,350

 
$
(236
)
 
$
6,114

 
$
1,448

 
$
(132
)
 
$
1,316

Amortization expense for definite-lived intangible assets was $66 million for the three months and $111 million for the nine months ended September 27, 2015 and was $23 million for the three months and $68 million for the nine months ended September 28, 2014. Aside from amortization expense, the changes in definite-lived intangible assets from December 28, 2014 to September 27, 2015 reflect the impacts of preliminary purchase accounting, $553 million of transfers from indefinite-lived intangible assets and foreign currency. We estimate that annual amortization expense for definite-lived intangible assets for each of the next five years will be approximately $268 million.
Note 7. Income Taxes
The provision for income taxes consists of provisions for federal, state and foreign income taxes. We operate in an international environment; accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates.

13



The total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $357 million at September 27, 2015 and $71 million at December 28, 2014. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $225 million at September 27, 2015 and $58 million at December 28, 2014. It is reasonably possible that the amount of unrecognized tax benefits will decrease by as much as $127 million in the next 12 months primarily due to the progression of federal, state and foreign audits in process.
The September 27, 2015 gross unrecognized tax balance has increased substantially as a result of 2015 Merger preliminary purchase accounting and the recognition of a tax reserve resulting from an unfavorable judgment in a foreign tax court case in the third quarter of 2015. While we plan to continue vigorously defending our position, the unfavorable court decision has resulted in a change in our evaluation of the ability to record benefits for the issue. As a result, the issue has now been fully reserved for all tax years which have not been substantially concluded.
The effective tax rate for the three months ended September 27, 2015 was a benefit of 29.1% compared to an expense of 18.8% for the three months ended September 28, 2014. The effective tax rate for the nine months ended September 27, 2015 was a benefit of 92.4% compared to an expense of 19.8% for the nine months ended September 28, 2014. The change in the effective tax rate for the three and nine months ended September 27, 2015 is primarily driven by losses in the U.S. at a high statutory tax rate and a $76 million tax benefit resulting from an internal restructuring which caused a reduction of the state deferred tax rate on certain of our assets. Additionally, in the nine months ended September 27, 2015, we released approximately $14 million of valuation allowances. The release resulted from ongoing profitability in two foreign jurisdictions and expected profitability in a U.S. entity as a result of the 2015 Merger. The benefits in the three and nine months ended September 27, 2015 were partially offset by an increase in tax reserves of $43 million primarily resulting from the unfavorable court decision discussed above, and a $27 million expense resulting from an increase of state deferred tax rates as a result of the 2015 Merger.
Note 8. Employees’ Stock Incentive Plans
Stock Options:
In October 2013, the Heinz board of directors adopted the Heinz 2013 Omnibus Incentive Plan (the “2013 Omnibus Plan”), which authorized the issuance of shares of capital stock. Each Heinz stock option that was outstanding under the 2013 Omnibus Plan program immediately prior to the completion of the 2015 Merger was converted into 0.443332 of a Kraft Heinz stock option. Following this conversion, the 2013 Omnibus Plan authorized the issuance of up to 17,555,947 shares of our capital stock. All Heinz stock option amounts have been retrospectively adjusted for all periods presented to give effect to this conversion. We grant non-qualified stock options under the 2013 Omnibus Plan to select employees with a five-year cliff vesting. Such options have a maximum exercise term of ten years. If a participant is involuntarily terminated without cause, 20% of their options will vest, on an accelerated basis, for each full year of service after the grant date.
Prior to the 2015 Merger, Kraft issued equity awards, including stock options and restricted stock units (“RSUs”), under its 2012 Performance Incentive Plan. As a result of the 2015 Merger, each outstanding Kraft stock option was converted into an option to purchase a number of shares of our common stock based upon an option adjustment ratio. The aggregate number of shares of our common stock that may be issued under these Kraft stock options was 13.9 million with a weighted average exercise price of $37.69. These Kraft stock options will continue to vest and become exercisable in accordance with the terms and conditions as were applicable immediately prior to the completion of the 2015 Merger. Such options generally become exercisable in three annual installments beginning on the first anniversary of the grant date, and have a maximum exercise term of ten years.
We granted 3.4 million option awards during the nine months ended September 27, 2015 with a weighted average grant date fair value per share of $9.60, as computed using the Black-Scholes option pricing model. During the nine months ended September 27, 2015, 0.7 million stock options were exercised with a total intrinsic value of $21 million.
Our stock option activity from December 28, 2014 to September 27, 2015 was:
 
Number of Stock Options
Options outstanding at December 28, 2014
8,570,796

Kraft options converted
13,887,135

Options granted
3,409,031

Options forfeited
(593,462
)
Options exercised
(655,436
)
Options outstanding at September 27, 2015
24,618,064


14



Restricted Stock Units:
Each Kraft RSU that was outstanding immediately prior to the completion of the 2015 Merger was converted into one Kraft Heinz RSU. Kraft Heinz RSUs will continue to vest and be settled in accordance with the terms and conditions that were applicable immediately prior to the completion of the 2015 Merger. As a result of the 2015 Merger, 2.0 million RSUs were converted to Kraft Heinz RSUs. During the nine months ended September 27, 2015, 0.4 million shares of RSUs vested at an aggregate market value of $31 million.

Total Equity Awards:
The compensation cost related to equity awards is primarily recognized in SG&A. Equity award compensation cost and the related tax benefit was:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
(in millions)
Pre-tax compensation cost
$
91

 
$
3

 
$
98

 
$
6

Tax benefit
34

 
1

 
37

 
2

After-tax compensation cost
$
57

 
$
2

 
$
61

 
$
4

Unrecognized compensation cost related to unvested equity awards was $133 million at September 27, 2015 and is expected to be recognized over a weighted average period of 2 years.
Note 9. Postemployment Benefits
Our employees participate in various employee benefit plans. Prior to the 2015 Merger, Kraft provided a range of benefits to its employees and retirees, including pension benefits and postretirement healthcare benefits. As part of the 2015 Merger, we assumed the assets and liabilities associated with these plans. Accordingly on the Merger Date we recorded assets of $89 million and liabilities of $4.4 billion on our balance sheet related to Kraft's postemployment benefit plans.
Pension Plans
Components of Net Pension Cost/(Benefit):
Net pension cost/(benefit) consisted of the following for the three and nine months ended September 27, 2015 and September 28, 2014:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
U.S. Plans
 
Non-U.S. Plans
 
U.S. Plans
 
Non-U.S. Plans
 
(in millions)
Service cost
$
22

 
$
1

 
$
8

 
$
6

 
$
25

 
$
3

 
$
18

 
$
19

Interest cost
82

 
7

 
30

 
28

 
91

 
22

 
73

 
83

Expected return on plan assets
(86
)
 
(12
)
 
(55
)
 
(44
)
 
(94
)
 
(35
)
 
(140
)
 
(132
)
Amortization of unrecognized losses
1

 

 

 

 
3

 

 

 

Settlements

 

 
8

 

 

 

 
19

 

Curtailments
(1
)
 

 
(7
)
 
(2
)
 
(1
)
 

 
(9
)
 
(2
)
Special termination benefits

 

 
4

 
2

 

 

 
4

 
2

Other
3

 

 

 

 
3

 

 

 

Net periodic cost/(benefit)
$
21

 
$
(4
)
 
$
(12
)
 
$
(10
)
 
$
27

 
$
(10
)
 
$
(35
)
 
$
(30
)
Employer Contributions:
During the nine months ended September 27, 2015, we contributed $4 million to our U.S. pension plans and $43 million to our non-U.S. pension plans. Based on our contribution strategy, we plan to make further contributions of approximately $45 million to our U.S. plans and approximately $15 million to our non-U.S. plans during the remainder of 2015. However, our actual

15



contributions may differ due to many factors, including changes in tax, employee benefit, or other laws, tax deductibility, significant differences between expected and actual pension asset performance or interest rates, or other factors.
Postretirement Benefit Plans
Components of Net Postretirement Health Care Cost:
Net postretirement health care cost consisted of the following for the three and nine months ended September 27, 2015 and September 28, 2014:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
(in millions)
Service cost
$
7

 
$
2

 
$
9

 
$
4

Interest cost
33

 
3

 
37

 
7

Amortization of prior service credits
(28
)
 
(2
)
 
(31
)
 
(5
)
Curtailments
1

 
(7
)
 
1

 
(7
)
Net postretirement health care cost
$
13

 
$
(4
)
 
$
16

 
$
(1
)
During the third quarter of 2015, we remeasured certain postretirement benefit plans due to plan changes and headcount reductions, resulting in a decrease of $0.9 billion to accumulated other comprehensive losses, net of tax. The amortization of prior service credits of $28 million in the three months and $31 million in the nine months ended September 27, 2015 was primarily driven by one month of amortization related to these plan changes.
Note 10. Accumulated Other Comprehensive Losses
The components of, and changes in, accumulated other comprehensive losses were as follows (net of tax):
 
Foreign Currency Translation Adjustments
 
Net Postemployment Benefit Plan Adjustments
 
Net Cash Flow Hedge Adjustments
 
Total
 
(in millions)
Balance as of December 28, 2014
$
(574
)
 
$
61

 
$
(61
)
 
$
(574
)
Foreign currency translation adjustments
(1,426
)
 

 

 
(1,426
)
Net deferred gains on net investment hedges
421

 

 

 
421

Net postemployment benefit gains

 
873

 

 
873

Reclassification of net postemployment benefit gains to net income

 
(4
)
 

 
(4
)
Net deferred losses on cash flow hedges

 

 
(32
)
 
(32
)
Net deferred losses on cash flow hedges reclassified to net income

 

 
129

 
129

Total other comprehensive (loss)/income
(1,005
)
 
869

 
97

 
(39
)
Balance as of September 27, 2015
$
(1,579
)
 
$
930

 
$
36

 
$
(613
)
The tax (expense)/benefit recorded in and associated with each component of other comprehensive income/(loss) for the three and nine months ended September 27, 2015 and September 28, 2014 were as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
(in millions)
Net deferred gains on net investment hedges
$
(45
)
 
$
(166
)
 
$
(240
)
 
$
(67
)
Net postemployment benefit gains/(losses)
$
(554
)
 
$
9

 
$
(548
)
 
$
16

Reclassification of net postemployment benefit gains to net income
$
8

 
$
1

 
$
5

 
$
2

Net deferred gains/(losses) on cash flow hedges
$
(8
)
 
$
(15
)
 
$
35

 
$
64

Net deferred (gains)/losses on cash flow hedges reclassified to net income
$
6

 
$
2

 
$
(78
)
 
$
7


16



The amounts reclassified from accumulated other comprehensive losses in the three and nine months ended September 27, 2015 and September 28, 2014 were as follows:
Accumulated Other Comprehensive Losses Component
 
 Reclassified from Accumulated Other Comprehensive (Loss)/Income to Net Income
 
Affected Line Item in the Statement Where Net Income is Presented
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
 
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
 
 
 
(in millions)
 
 
Losses/(gains) on cash flow hedges:
 

 
 

 
 
 
 

     Foreign exchange contracts
 
$

 
$


$
2

 
$
1

 
Net sales
     Foreign exchange contracts
 
(16
)
 
2


(32
)
 
(7
)
 
Cost of products sold
     Foreign exchange contracts
 

 

 
(1
)
 
(1
)
 
Other expense, net
     Interest rate contracts
 
1

 


238

 

 
Interest expense
 
 
(15
)
 
2


207

 
(7
)
 
Income before income taxes
 
 
6

 
2


(78
)
 
7

 
Provision for income taxes
 
 
$
(9
)
 
$
4


$
129

 
$

 
Net income
Losses/(gains) on postemployment benefits:
 
 
 
 

 
 
 
 

Amortization of unrecognized losses
 
$
1

 
$


$
3

 
$

 
(a)
     Prior service credits
 
(28
)
 
(2
)

(31
)
 
(5
)
 
(a)
     Settlement loss
 
8

 


19

 

 
(a)
 
 
(19
)
 
(2
)

(9
)
 
(5
)
 
Income before income taxes
 
 
8

 
1


5

 
2

 
Provision for income taxes
 
 
$
(11
)
 
$
(1
)

$
(4
)
 
$
(3
)
 
Net income

(a)
These components are included in the computation of net periodic postemployment benefit costs. See Note 9, Postemployment Benefits, for additional information.
In this note we have excluded activity and balances related to noncontrolling interest (which was primarily comprised of foreign currency translation adjustments) due to its insignificance.

17



Note 11. Debt
Long-Term Debt:
At September 27, 2015, the carrying value of our long-term debt consisted of the following (in millions of dollars):
Currency:
 
Maturity Dates
 
Interest Rates*
 
Carrying Value
U.S. Dollar
 
2016-2045
 
1.500%-7.125%
 
$
22,807

Canadian Dollar
 
2018-2020
 
1.787%-2.700%
 
748

Euro
 
2023
 
2.000%
 
828

British Pound Sterling
 
2027-2030
 
4.125%-6.250%
 
801

Capital lease obligations (various)
 
 
 
 
 
140

Total long-term debt
 
 
 
 
 
$
25,324

Current portion of long-term debt
 
 
 
 
 
74

Total long-term debt, excluding current portion
 
 
 
 
 
$
25,250

*Floating interest rates are stated as of September 27, 2015
At December 28, 2014, the carrying value of our long-term debt was $13.4 billion. During the nine months ended September 27, 2015, the composition of our long-term debt changed largely due to the assumption of all outstanding long-term debt obligations of Kraft in connection with the 2015 Merger, as well as certain debt issuances, refinancing activities and repayments as summarized in the table below (excluding capital lease activity):
 
 Aggregate Principal Amount
 
(in millions)
Issuances and assumption of debt:
 
2025 Notes (a)
$
2,000

Euro Notes(b)
750

Pound Sterling Notes(c)
£
400

US Dollar Notes(d)
$
10,000

Canadian Dollar Notes(e)
C$
1,000

Term Loan Facility (f)
$
600

Assumption of Kraft's long-term debt obligations(g)
$
8,600

 
 
Debt repayments(h):
 
Term B-1 Loan
$
2,780

Term B-2 Loan
$
5,601

2020 Notes
$
3,100

2025 Notes
$
800

(a)
$2.0 billion aggregate principal amount of 4.875% Second Lien Senior Secured Notes due February 15, 2025 (the “2025 Notes”)
(b)
€750 million aggregate principal amount of 2.000% Senior Notes due June 30, 2023 (the “Euro Notes”)
(c)
£400 million aggregate principal amount of 4.125% Senior Notes due July 1, 2027 (the “Pound Sterling Notes”)
(d)
$1.0 billion aggregate principal amount of 1.600% Senior Notes due June 30, 2017;
$1.5 billion aggregate principal amount of 2.000% Senior Notes due July 2, 2018;
$1.5 billion aggregate principal amount of 2.800% Senior Notes due July 2, 2020;
$1.0 billion aggregate principal amount of 3.500% Senior Notes due July 15, 2022;
$2.0 billion aggregate principal amount of 3.950% Senior Notes due July 15, 2025;
$1.0 billion aggregate principal amount of 5.000% Senior Notes due July 15, 2035; and
$2.0 billion aggregate principal amount of 5.200% Senior Notes due July 15, 2045 (collectively, the “U.S. Dollar Notes”)
(e)
C$200 million aggregate principal amount of Floating Rate Senior Notes due July 6, 2018, C$300 million aggregate principal amount of 2.700% Senior Notes due July 6, 2020, and C$500 million aggregate principal amount of Floating Rate Senior Notes due July 6, 2020 (collectively, the “Canadian Dollar Notes”)
(f)
$600 million aggregate principal amount of our Senior Unsecured Term Loan Facility floating rate (LIBOR plus 1.250%) due July 6, 2020 (the “Term Loan Facility”)

18



(g)
In connection with the 2015 Merger, Kraft Heinz Foods Company, our 100% owned subsidiary, assumed all of the long-term debt obligations of Kraft including the following obligations relating to its notes (collectively, the “Kraft Notes”). :
$1.0 billion aggregate principal amount of 2.250% Notes due June 5, 2017;
$1,035 million aggregate principal amount of 6.125% Notes due August 23, 2018;
$900 million aggregate principal amount of 5.375%Notes due February 10, 2020;
$2.0 billion aggregate principal amount of 3.500% Notes due June 6, 2022;
$878 million aggregate principal amount of 6.875% Notes due January 26, 2039;
$787 million aggregate principal amount of 6.500% Notes due February 9, 2040; and
$2.0 billion aggregate principal amount of 5.000% Notes due June 4, 2042
The aggregate principal amounts above exclude a $686 million fair value adjustment that was recorded in preliminary purchase accounting as a debt premium.
(h)
In January 2015 we repaid $650 million aggregate principal amount of the Term B-1 Loan and $1,310 million aggregate principal amount of the Term B-2 Loan. On July 2, 2015, we repaid the remaining aggregate principal amounts of the Term B-1 Loan and the Term B-2 Loan, fully redeemed $3.1 billion aggregate principal amount of the 4.250% Second Lien Senior Secured Notes due 2020 (the “2020 Notes”) and partially redeemed $800 million aggregate principal amount of the 2025 Notes.
In relation to our debt repayments, during the nine months ended September 27, 2015, we recorded a $341 million loss on extinguishment of debt, which was comprised of a write-off of debt issuance costs of $236 million in interest expense and call premiums of $66 million on the 2020 Notes and $39 million on the 2025 Notes in other expense, net.
The Euro Notes, Pound Sterling Notes, U.S. Dollar Notes, Canadian Dollar Notes and Kraft Notes are fully and unconditionally guaranteed by us. Additionally, in connection with the 2015 Merger, we became a guarantor of:
$1,719 million aggregate principal amount of securities previously issued by Kraft Heinz Foods Company, our 100% owned subsidiary, consisting of: 2.000% U.S. Dollar Notes due 2016, 1.500% U.S. Dollar Notes due 2017, 3.125% U.S. Dollar Notes due 2021, 2.850% U.S. Dollar Notes due 2022, 6.375% Debentures due 2028, 6.750% Debentures due 2032, and 7.125% Debentures due 2039.
£125 million aggregate principal amount of 6.250% Pound Sterling notes due 2030 previously issued by H.J. Heinz Finance UK Plc and guaranteed by Kraft Heinz Foods Company.
Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all debt covenants at September 27, 2015.
Debt Issuance Costs:
At September 27, 2015, unamortized debt issuance costs were $88 million. Unamortized debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of the debt liability. Amortization of debt issuance costs was $2 million for the three months and $24 million for the nine months ended September 27, 2015 and $12 million for the three months and $37 million for the nine months ended September 28, 2014.
Debt Discount/Premium:
At September 27, 2015, unamortized debt premium, net was $720 million. Amortization of our debt premium, net was $21 million for the three months and $24 million for the nine months ended September 27, 2015 and $1 million for the three months and $3 million for the nine months ended September 28, 2014.
Borrowing Arrangements:
On July 6, 2015, together with Kraft Heinz Foods Company, our 100% owned subsidiary, we entered into a new $4.0 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) that will mature on July 6, 2020, and a $600 million Term Loan Facility that will mature on July 6, 2020, unless extended (together with the Revolving Credit Facility, the “Senior Credit Facilities”). The Revolving Credit Facility includes a $1.0 billion sub-limit for borrowings in Canadian dollars, Euro or Sterling as well as a letter of credit sub-facility of up to $150 million. Subject to certain conditions, we may increase the amount of revolving commitments and/or add additional tranches of term loans in a combined aggregate amount of up to $1.0 billion. Any committed borrowings under the Senior Credit Facilities bear interest at a variable annual rate based on LIBOR/EURIBOR/CDOR loans or an alternate base rate/Canadian prime rate, in each case subject to an applicable margin based upon the long-term senior unsecured, non-credit enhanced debt rating assigned to us. The Senior Credit Facilities contain representations, warranties and covenants that are typical for these types of facilities. In addition, we and Kraft Heinz Foods Company guarantee certain borrowings and other liabilities under the Senior Credit Facilities. At September 27, 2015, $600 million aggregate principal amount of our Term Loan Facility was outstanding. no amounts were drawn on our Revolving Credit Facility at September 27, 2015 or during the nine months ended September 27, 2015. In connection with the consummation of the 2015 Merger, on July 2, 2015, all outstanding obligations with respect to principal, interest, and fees under our previous credit agreement, dated as of June 7, 2013, were repaid and such credit agreement was terminated.

19



Fair Value of Debt:
At September 27, 2015, the aggregate fair value of our total debt was $26.1 billion as compared with the carrying value of $25.3 billion. We determined the fair value of our long-term debt using Level 2 inputs. Fair values are generally estimated based on quoted market prices for identical or similar instruments.
Note 12. Preferred Stock and Warrants
Our Amended and Restated Certificate of Incorporation authorizes the issuance of up to 1 million shares of preferred stock.
In connection with the 2013 Merger, we issued 80,000 shares of 9.00% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) and warrants to purchase 46 million of Heinz common shares, at an exercise price of $0.01 per common share (“the Warrants”), for an aggregate purchase price of $8.0 billion. We allocated the proceeds to the Series A Preferred Stock ($7,633 million) and the Warrants ($367 million) on a relative fair value basis. In June 2015, Berkshire Hathaway exercised the Warrants to purchase the additional 46 million of common shares, which were subsequently reclassified and changed into approximately 20 million shares of Kraft Heinz common stock.
The Series A Preferred Stock 9.00% annual dividend accrues whether or not declared by our Board of Directors and is payable, quarterly in arrears, only when declared and approved by our Board of Directors. In the event of our liquidation, dissolution, or wind up, whether voluntary or involuntary, each Series A Preferred Stock holder would be entitled to receive $100,000 per share plus any accrued and unpaid dividends. This payment would be made before any distribution of assets or proceeds to holders of common stock, or other stock ranked junior to the Series A Preferred Stock. We may not redeem the Series A Preferred Stock before June 7, 2016. On or after this date, we may redeem shares of Series A Preferred Stock, at a redemption price paid in cash for each share equal to the sum of (i) the Base Amount per share (as defined below), plus (ii) the accrued and unpaid dividends on each share. The “Base Amount” means one of the following amounts, as applicable:

$104,000 per share for any payment from June 7, 2016 and through June 6, 2017;

$105,000 per share for any payment made from June 7, 2017 and through June 6, 2018;

$106,000 per share for any payment made from June 7, 2018 and through June 6, 2019;

$107,000 per share for any payment made from June 7, 2019 and through June 6, 2020; and

$108,000 per share for any payment made on or after June 7, 2020.
In addition, after June 7, 2021, the holders of our Series A Preferred Stock can require us to undertake a redemption offering, as defined, and use the proceeds net of expenses of such redemption offering to redeem outstanding Series A Preferred Stock at the redemption price of $108,000 per share. As a result, the Series A Preferred Stock is considered contingently redeemable and is shown on our condensed consolidated balance sheets separate from shareholders’ equity. During 2013, the carrying value of the Series A Preferred Stock was adjusted from its initial carrying value to the initial redemption price of $104,000. In the event we do not redeem the Series A Preferred Stock between June 7, 2016 and June 6, 2017, we will be required to record further accretion adjustments through net income attributable to common shareholders up to the maximum redemption price of $108,000.
Note 13. Financing Arrangements
We routinely enter into accounts receivable securitization and factoring programs. We account for transfers of receivables pursuant to these programs as a sale and remove them from the consolidated balance sheet. Significant new or updated programs are as follows:
On October 9, 2015, we entered into a $150 million U.S. securitization program, replacing a similar arrangement in existence during the nine months ended September 27, 2015. Under this program, we will receive cash consideration of up to $150 million and a receivable for the remainder of the purchase price (the “Deferred Purchase Price”). This securitization program utilizes a bankruptcy-remote special-purpose entity (“SPE”). The SPE is wholly owned by a subsidiary of Kraft Heinz and its sole business consists of the purchase or acceptance, through capital contributions of receivables and related assets, from a Kraft Heinz subsidiary and subsequent transfer of such receivables and related assets to a bank. Although the SPE is included in our condensed consolidated financial statements, it is a separate legal entity with separate creditors who will be entitled, upon its liquidation, to be satisfied out of the SPE's assets prior to any assets or value in the SPE becoming available to Kraft Heinz or its subsidiaries. The assets of the SPE are not available to pay creditors of Kraft Heinz or its subsidiaries. This program expires in October 2016.

20



We have a $70 million Australian dollar factoring program in which we receive cash consideration of up to $70 million Australian dollars and a receivable for the Deferred Purchase Price. This program began in August 2014 and automatically renews annually until it is terminated by either party.
We have a $50 million New Zealand dollar factoring program in which we receive cash consideration of up to $50 million New Zealand dollars and a receivable for the Deferred Purchase Price. This program began in August 2014 and automatically renews annually until it is terminated by either party.
We have a £90 million and €35 million European factoring program in which we receive cash consideration of up to ninety-five percent of the £90 million and €35 million facilities and a receivable for the remainder of the Deferred Purchase Price. This program began in December 2014 and automatically renews annually until it is terminated by either party.
The cash consideration and carrying amount of receivables removed from the condensed consolidated balance sheets in connection with the above programs were $267 million at September 27, 2015 and $284 million at December 28, 2014. The fair value of the Deferred Purchase Price was $83 million at September 27, 2015 and $161 million at December 28, 2014. The Deferred Purchase Price is included in trade receivables on the condensed consolidated balance sheets and had a carrying value which approximated its fair value at September 27, 2015 and December 28, 2014. The proceeds from these sales are recognized on the condensed consolidated statements of cash flows as a component of operating activities. We act as servicer for these arrangements and have not recorded any servicing assets or liabilities for these arrangements as of September 27, 2015 and December 28, 2014 because they were not material to the financial statements.
Note 14. Financial Instruments
Derivative Volume:
We operate internationally, with manufacturing and sales facilities in various locations around the world, and utilize certain derivative financial instruments to manage commodity price risk, foreign currency, debt and interest rate exposures. The notional values of our derivative instruments at September 27, 2015 and December 28, 2014 were:
 
Notional Amount
 
September 27, 2015
 
December 28, 2014
 
(in millions)
Commodity contracts
$
954

 
$

Foreign exchange contracts
1,824

 
4,607

Cross-currency contracts
4,418

 
9,900

Interest rate contracts

 
7,921


21



Fair Value of Derivative Instruments:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair values and the levels within the fair value hierarchy of derivative instruments recorded on the condensed consolidated balance sheets at September 27, 2015 and December 28, 2014 were (in millions):
 
September 27, 2015
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total Fair Value
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$

 
$
45

 
$
13

 
$

 
$

 
$
45

 
$
13

Cross-currency contracts

 

 
513

 

 

 

 
513

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
25

 
54

 
1

 
4

 

 

 
26

 
58

Foreign exchange contracts

 

 
35

 
1

 

 

 
35

 
1

Cross-currency contracts

 

 
66

 

 

 

 
66

 

Total fair value
$
25

 
$
54

 
$
660

 
$
18

 
$

 
$

 
$
685

 
$
72

 
December 28, 2014
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total Fair Value
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$

 
$
46

 
$
15

 
$

 
$

 
$
46

 
$
15

Cross-currency contracts

 

 
357

 
2

 

 

 
357

 
2

Interest rate contracts

 

 
2

 
16

 

 

 
2

 
16

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts

 

 
169

 
108

 

 

 
169

 
108

Total fair value
$

 
$

 
$
574

 
$
141

 
$

 
$

 
$
574

 
$
141

Our derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. We elect to record the gross assets and liabilities of our derivative financial instruments on the condensed consolidated balance sheets. If the derivative financial instruments had been netted on the condensed consolidated balance sheets, the asset and liability positions each would have been reduced by $40 million at September 27, 2015 and $141 million at December 28, 2014. No material amounts of collateral were received or posted on our derivative assets and liabilities at September 27, 2015.
Level 1 financial assets and liabilities consist of commodity future and options contracts and are valued using quoted prices in active markets for identical assets and liabilities.
Level 2 financial assets and liabilities consist of commodity forwards, foreign exchange forwards, interest rate swaps and cross-currency swaps. Commodity forwards are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount. Foreign exchange forwards are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Cross-currency swaps are valued based on observable market spot and swap rates. Interest rate swaps are valued based on observable market swap rates.
Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk.
There have been no transfers between Levels 1, 2 and 3 in any period presented.

22



The fair values of our asset derivatives are recorded within other current assets and other assets. The fair values of our liability derivatives are recorded within other current liabilities and other liabilities.
Foreign Currency Hedging:
We use forward contracts to mitigate our foreign currency exchange rate exposure due to forecasted purchases of raw materials, sales of finished goods, and future settlement of foreign currency denominated assets and liabilities. Our principal foreign currency exposures that are hedged include the British Pound Sterling, Euro, Canadian dollar, and New Zealand dollar. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities that meet the criteria for hedge accounting are designated as cash flow hedges. Consequently, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive losses and is recognized in net income at the time the hedged item affects net income, in the same line item as the underlying hedged item. Forward points are excluded from the assessment and measurement of hedge ineffectiveness, which are reported in current period net income as interest expense.
Net Investment Hedging:
We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency exchange rates. We manage this risk by utilizing derivative and non-derivative instruments, including cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges.
In the third quarter of 2015, we issued foreign denominated debt instruments, which we designated as net investment hedges. At September 27, 2015, the principal amounts of this foreign denominated debt totaled €0.8 billion and £0.4 billion.
At September 27, 2015, our cross-currency swaps consisted of:
Instrument
 
Pay
%
 
Notional
(local)
(in billions)
 
Receive
%
 
Notional
(USD)
(in billions)
 
Exchanges
 
Maturity
Cross-currency swap
 
6.462%
 
£
0.8

 
6.15%
 
$
1.4

 
Jan-Apr-Jul-Oct
 
October 2019
Cross-currency swap
 
5.696%
 
0.9

 
6.15%
 
$
1.1

 
Jan-Apr-Jul-Oct
 
October 2019
Cross-currency swap
 
6.68%
 
C$
1.8

 
6.15%
 
$
1.6

 
Mar-Jun-Sep-Dec
 
December 2019
The component of the gains and losses on our net investment in these designated foreign operations, driven by changes in foreign exchange rates, are economically offset by movements in the fair values of our cross-currency swap contracts and remeasurement of our foreign denominated debt. The fair value of the swaps and remeasurement of our foreign denominated debt are calculated each period with changes in fair value reported in foreign currency translation adjustments within accumulated other comprehensive losses, net of tax. Such amounts will remain in accumulated other comprehensive losses until the complete or substantially complete liquidation of our investment in the underlying foreign operations. As of September 27, 2015, we had partially unwound our Euro swap (USD notional amount of $1.9 billion) and our British Pound Sterling swap (USD notional amount of $3.2 billion). Additionally, as of September 27, 2015, we had fully unwound our Australian dollar swap (USD notional amount of $750 million) and our Japanese yen swap (USD notional amount of $50 million).
Interest Rate Hedging:
We have used interest rate swaps to manage debt and interest rate exposures. We are exposed to interest rate volatility with regard to existing fixed and floating rate debt and could be exposed to such volatility for future issuances. Primary exposures include United States Treasury rates and London Interbank Offered Rates (“LIBOR”).
In the second quarter of 2015, we de-designated all of our outstanding interest rate swaps (total notional amount of $6.4 billion) from hedging relationships in connection with the repayment of the Term B-1 and Term B-2 loans. We determined that the related forecasted future cash flows were probable of not occurring, and as a result, we reclassified $227 million of deferred losses reported in accumulated other comprehensive losses to net income as interest expense.
Hedge Coverage:
At September 27, 2015, we had hedged forecasted transactions for the following durations:
foreign currency transactions for periods not exceeding the next two years; and
cross-currency transactions for periods not exceeding the next four years.
Hedge Ineffectiveness:
We record the pre-tax gains or losses reclassified from accumulated other comprehensive losses due to ineffectiveness in:
other expense, net for foreign exchange contracts related to forecasted transactions; and
interest expense for interest rate contracts.

23



Deferred Hedging Gains and Losses:
Based on our valuation at September 27, 2015 and assuming market rates remain constant through contract maturities, we expect to transfer unrealized gains of $45 million (net of taxes) for foreign currency cash flow hedges, and unrealized losses of $3 million (net of taxes) for interest rate cash flow hedges to net income during the next 12 months.
Concentration of Credit Risk:
Counterparties to foreign exchange and interest rate derivatives consist of major international financial institutions. We continually monitor our positions and the credit ratings of the counterparties involved and, by policy, limit the amount of our credit exposure to any one party. While we may be exposed to potential losses due to the credit risk of non-performance by these counterparties, losses are not anticipated. We closely monitor the credit risk associated with our counterparties and customers and to date have not experienced material losses.
Economic Hedging:
We enter into certain derivative contracts not designated as hedging instruments in accordance with our risk management strategy which have an economic impact of largely mitigating commodity price risk and foreign currency exposures. In order to manage the volatility related to forecasted purchases of certain raw materials, we use futures, future options and forward contracts with maturities generally less than one year. We also enter into certain cross currency swap and foreign currency forward contracts to help mitigate the translation impact resulting from accounting remeasurement of certain foreign-currency denominated intercompany loans and other foreign-currency denominated activities between our subsidiaries. These cross currency and forward contracts are scheduled to mature within the next four years. Gains and losses are recorded in net income as a component of cost of products sold for our commodity contracts and other expense, net for our cross currency swap and foreign currency contracts.
Derivative Impact on the Statements of Income and Statements of Comprehensive Income:
The following tables present the pre-tax effect of derivative instruments on the statements of income and statements of comprehensive income for the three and nine months ended September 27, 2015 and September 28, 2014:
 
For the Three Months Ended
 
September 27, 2015
 
September 28, 2014
 
Commodity Contracts
 
Foreign Exchange
Contracts
 
Cross-Currency Contracts
 
Interest Rate Contracts
 
Commodity Contracts
 
Foreign Exchange
Contracts
 
Cross-Currency Contracts
 
Interest Rate
Contracts
 
(in millions)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains recognized in other comprehensive income (effective portion)
$

 
$
53

 
$

 
$
<